American Laws — Not Chinese Ones — Make American Industry Less Competitive

Much has been said about the proposed steel and aluminum tariffs proposed by President Trump. It will likely usher in a trade war[2] the US is ill-equipped to fight. Tariffs are just another tax[3]. In general, tariffs are an all-around bad idea[4].

However, the underlying message of the tariff is it is put in place to protect employment. The message goes, steel producers deal with unfair practices abroad and, as such, need to have tariffs added to “level the playing field”. This certainly sounds appealing on the surface. Americans love fair play and equal application of rules. The problem is: if the playing field is tilted to the detriment of Americans, it is not due to the actions of foreign competition. The real culprit to the lack of American competitiveness is the American government that is proposing imposing tariffs.

If we step back and understand what competitiveness really is, the concept boils down to being able to produce a product at a particular quality for the best price. All else held equal, the best price always wins. The United States is certainly competitive on the global market. Despite the rhetoric, the US is currently the second largest exporter[5] in the world behind China. The US has a major international presence[6] in computer technology, automobiles, manufactured goods and pharmaceuticals. There is certainly a great deal of competitiveness in the US. If the US was somehow disadvantaged by foreign subsidy, it would be difficult to, say, export $109 billion in automotive products each year.

The problem with US competitiveness doesn’t come from the presence of foreign competition but from internal issues. The issue arises with the regulatory State, which currently burdens the US economy with around $2 trillion in dead weight costs[7]. There are two ways we can look at this:

There are approximately 133 million people employed in the productive economy (156 million employed less 23 million employed in the public sector). This $2 trillion represents an additional per employee burden of $15,000.

If the government were to fully take on all regulatory functions in-house, it would require an additional, universal income tax of 13% to avoid taking on additional debt. However, since regulations are generally paid for by the business sector, which generated $225 billion last year[8] on estimated profits of $8 trillion, would require an across the board, no deductions allowed corporate tax hike of 25%.

In other words, government regulations are an effective business tax of 25% or personal income tax of 13%. Regulations are just a method that the government is able to impose programs without having to carry the cost on the official books. Since the government isn’t directly collecting the money, it doesn’t get formally registered as a tax and politicians can avoid the uncomfortable discussion with taxpayers when each new rule comes with a new tax hike.

The real question is, how more competitive would US Steel be if they were not protected by tariffs, but absolved of their $15,000 per head average regulatory imposition? The company currently employs 28,900 people. Regulatory reduction would potentially reduce the cost to the company by an estimated $433 million if using the head-count methodology. This goes a lot further than the whopping 500 people the company plans to hire as a result of business shift due to tariffs, or an opportunity cost of $866,000 for each new position added to the company. US Steel could hypothetically use that $433 million to expand employment by 4,300 people paid $100,000 a year or cut prices on steel products by $28 per ton and still maintain the same $341 million net income reported in fiscal year 2017[9] or shifted their 2015 and 2016 operating losses into operating profits, assuming sales don’t increase related to falling prices.

And this is just isolated to the steel industry. Imagine what Ford, with 202,000 employees, would be seeing in savings. If the same, admittedly not perfect, estimate held, Ford could shed $3 billion in extraneous regulatory costs, which would result in the ability of the company to cut the cost of each of their 2.4 million vehicles[10] sold by $1,250, instead of listening to pundits try and justify a price increase[11].

Since it’s objectively better to cut regulatory burden to improve American competitiveness and, thus, more employment, why are tariffs still being discussed? A key reason is that the government tends to follow a tax cut with a tax increase elsewhere. When a Republican is in office, this usually manifests as increasing a tax but refusing to call it a tax. Reagan, the tax cutting champion, rolled back nearly all the tax cuts from 1981 in the Tax Equity and Fiscal Responsibility Act of 1982[12] by referring to them as “closing loopholes” and again in 1983 when Social Security taxes were increased[13], but referred to as “insurance premiums[14]”. But, of course, he was so not happy about it, you guys[15].

What better way to convince the public to happily accept a 25% sales tax hike on steel products and a 10% sales tax hike on aluminum products? Just call them job saving tariffs. The government can raise your taxes and pretend they’re the champion of the little guy all at the same time. The government needs to make up for the corporate tax rate decrease it just passed, so expect more taxes beyond steel and aluminum tariffs to manifest. Just don’t expect them to be called taxes.